The Remain-supporting media’s latest favourite plot line is the stark contrast between the EU – which is said to be on the up, buoyed by a renewed sense of purpose and unity – and the UK, which looks faltering and divided.
Among the evidence cited to support this theory is the fact that the British economy grew by 0.2 per cent during the first quarter of 2017, while the 26 other member-states’ economies expanded by 0.6 per cent collectively. Further proof is in the shape of Emmanuel Macron, French President, whose party, En Marche!, won comfortably in the French legislative elections, consolidating his position and allowing him to pursue his pro-EU agenda. This supposedly re-enforces the Franco-German core of the EU, empowering the whole.
The comparison with the UK, where our Prime Minister, Theresa May, is leading a minority government after botching her election gamble, is irresistible. It is hardly surprising that some have decided that the UK is looking like a confused little country on the edge of a powerful trading bloc. And that many Remainers feel vindicated.
It’s a blinkered view, though. The UK’s economy will be in far better shape once the uncertainty around Brexit negotiations resolves and Government instability subsides; the EU, however, will be struggling with its various structural problems for some time to come.
Just take a look. The EU is still heavily indebted – the eurozone countries even more so – and running a significant deficit. At the end of 2016 EU debt stood at 83.5 per cent of GDP. The eurozone’s is at a massive 90.7 per cent.
It’s true that Germany is in relatively good shape – but it certainly needs to be for when it is called on to shoulder the burden of any future economic crisis. At the end of 2016, its debt was 68.3 per cent of GDP and falling fast, as Germany posted a surplus of 0.8 per cent of GDP at the end of 2016. Will it continue? Only the outcome of the September Federal election will give us a clue as to whether the picture will hold up.
Meanwhile, the other major eurozone economies have far less healthy balance sheets. France’s debt to GDP was 96 per cent at the end of 2016, while it ran a deficit of 3.4 per cent in the same year – in breach of the EU’s own rules. Italy, the sick man of Europe, has a debt to GDP of 132.6 per cent, with a deficit of 2.4 per cent. Spain has a debt to GDP of 99.4 per cent, and a deficit of 4.5 per cent.
What these alarming numbers tell us is that nothing has changed since the financial and sovereign debt crisis. The European Stability Mechanism has been created, along with the European Fiscal Compact and aggressive European Central Bank Quantitative Easing, but the fundamental issue – that of too much debt – has not been resolved.
Government spending and debt levels have not returned to their pre-crisis levels. Interest rates remain at rock bottom – at emergency stimulus levels. Before 2009 the ECB had never set its interest rate below 1 per cent; since 2014, it has been at below 0 per cent. Rates this low would never be required in a healthy economy, but they have become the new normal in Europe – and indeed the rest of the developed world.
So while Europe’s economy might have been stabilised – it is still on life support. The continent is completely unprepared for another, even moderate, downturn.
And this downturn is overdue. The signs are already there. The US, for example, is experiencing its third-longest expansion period in history – but there are indications it might be slowing down, augurs of a possible slide into recession.
This can be seen clearly in the “credit impulse”, which is a measure of new credit issued as a per cent of GDP. This is a good indicator of the trajectory of private sector demand in an economy. Earlier this month, the Daily Telegraph warned that the credit impulse had been falling dramatically in China and in the US recently – akin to the movement it made during the Lehman Brother’s crisis. Such a dip suggests strong headwinds for the world economy.
If a slowdown were to occur in China, and a recession to hit the United States, it’s unlikely that Europe could escape the downturn. If tax receipts were to fall again, as happens in recessions, already significant deficits will escalate further. This would be particularly bad news for the eurozone.
It is true the rest of the Western world still has large national debts and deficits, combined with very low interest rates. But eurozone nations won’t find it so easy to finance their debt. Their inability to create more money to pay creditors, and reduce the risk of default, makes fiscal imprudence – of the type the eurozone as a whole is currently engaged in – far more risky.
As things stand, it would be very difficult for the eurozone nations, apart from, perhaps, Germany, to weather a moderate downturn. A larger sovereign debt crisis could well engulf the eurozone; it could even sound the death knell of the EU itself.
The news cycle flits from story to story. Economic figures fluctuate from quarter to quarter. Uncertainty around Brexit negotiations and the UK’s hung Parliament will fade: these are not structural problems baked in to our economy or democracy.
But the EU, and its eurozone core, have deep unaddressed structural issues, which make the nation states incredibly vulnerable to the next global downturn. In the long run, rather than seeming weak and wobbly, Britain’s decision to get out of the EU will be seen as one of great wisdom.
